What is Yield Management?

Yield management is a strategic pricing approach that aims to maximize revenue by adjusting prices based on demand and occupancy levels. Common in industries like hospitality and airlines, it analyzes customer booking patterns, demand fluctuations, and market conditions to set optimal prices for available inventory. In a general business context, "yield" refers to profit—the income remaining after covering all expenses.

What is Hotel Yield Management?

Hotel yield management is the practice of adjusting room prices based on demand to maximize revenue. It involves analyzing occupancy rates, market trends, and booking patterns to set optimal rates that attract guests while maximizing profit, especially during high-demand periods.

For hotels, this means using yield management systems and variable pricing strategies to offer different prices to different customer segments, often adjusting rates in real time based on factors like seasonality, market demand, and booking pace. This approach helps hotels maximize "yield" or revenue by filling more rooms at optimal rates. Hotel revenue management strategies can vary widely depending on the property’s size, amenities, and target market, but the goal remains the same: to maximize revenue by selling the right room at the right price to the right guest at the right time.

As a subset of revenue management, yield management focuses exclusively on finding your hotel’s optimal balance of supply and demand for its rooms, or the point where prices perfectly match traveler demand. That’s the point where your rates will “yield” the highest number of bookings at the highest possible price.  Before hotel professionals had access to rich consumer and travel data, yield management was the industry’s first foray into revenue management.

“Whereas revenue management involves predicting consumer behavior by segmenting markets, forecasting demand, and optimizing prices for several different types of products, yield management refers specifically to maximizing revenue through inventory control.” ~Livio Moretti, Distribution Strategy

Yield management is a tug-of-war of sorts between price and quantity. Set your rates too high, demand drops, bookings slow, and occupancy sinks. Set your rates too low and you sacrifice revenue for volume, potentially pushing demand beyond your ability to supply it -- that’s a bad place to be, as it not only pushes demand to your competitors but also increases the strain on your staff, potentially increasing expenses and further depressing profitability. Of course, supply and demand are never perfectly aligned. And it’s not a simple task to pursue that balance and stay on target. But the upside of greater revenues is worth it!

What is the Importance of Hotel Yield Management

The top advantage of hotel yield management is that it efficiently harnesses demand. It ensures that hoteliers are making the most money possible from their assets. With high fixed costs, hotels need to yield the most revenue possible from those fixed costs. Hotels also need to yield the most revenue from existing demand to be as efficient as possible with related distribution and marketing expenses.

Yield management is also a critical piece of profitability. If revenue goes up, and expenses are fixed, there’s a significant impact on profitability, as that additional revenue is nearly pure profit. On the flip side, if revenue drops and expenses stay the same, there’s a deterioration in profit. In a dynamic business like hotels, sudden dips in demand can quickly put hotels (especially independents and smaller brands) into crisis mode. Yield management shields somewhat from that downside and helps maximize the upside, all by more effectively managing existing demand.

A third advantage of yield management is that it’s a targeted task that doesn't take a village to accomplish. So, while you could also maximize yield (ie. profitability) by working with operations to reduce expenses or working with revenue management, marketing, and sales to increase revenues from room and non-room sources, yield management is more straightforward. It’s all about the data and, with a great revenue management system like Infor EzRMS, the process can be put on autopilot with minimal intervention. Yield management software is low-barrier and high-impact -- it really doesn’t get much better than that!

Yield Management Formula

The basic way to calculate yield is to quite literally calculate how much revenue you left on the table.  The formula is: Revenue Achieved / Maximum Potential Revenue.

Let's say your hotel has 50 all-suite rooms, with a rack rate of $350 each. That means that your total potential revenue is $17,500 ($350 rate multiplied by 50 rooms). Last night, you sold 25 rooms at $200 each, grossing $5,000. Your yield is then $5,000 divided by $17,500, or 28.5%. That yield may be concerning, but it doesn't tell the whole picture. 

Each yield must be compared to the bigger picture, such as your compset’s performance for the same date. And, yield management is generally done in advance, so that rates can be adjusted in real-time to account for advance booking trends. For instance, if you see a sustained spike in last-minute bookings at higher rates, you may want to consider increasing rates for future dates to further sustain those high-yield last-minute bookings.

To capture the most bookings at optimal rates, hotels must consider factors that impact demand, such as:

• Booking windows: Short booking windows, especially around holidays, make yield management dynamic.

• Market-level dynamics: Are there large events or holidays driving demand? Is local hotel supply shrinking or expanding?

• Compset positioning: Perceived value compared to competitors plays a big role in hotel demand.

• Macroeconomic conditions: Periods of recession require different strategies than periods of growth.

• Historical performance: Insights into past booking trends aid future forecasting.

• Segments: Each segment, like leisure or business travelers, has distinct demand curves.

• Seasonality: Time of year often drives predictable patterns in hotel demand.

The next step is to take all of this information and translate it into a full yield management strategy.

How to do Yield Management

There are two primary ways to manage yield in hotels: manually or with automated tools. Here’s how the manual process typically works:

1. Gather Rates and Availability Data: Start by pulling current room rates and availability information from your Property Management System (PMS). This data gives you an overview of occupancy levels and pricing trends.

2. Collect Competitor Data: Retrieve competitor pricing data from Online Travel Agency (OTA) channels, or use rate intelligence tools to see how your competitors are pricing similar rooms. This insight helps you align your rates with market conditions.

3. Consolidate Data into a Spreadsheet: Combine your internal rates and availability with competitor data in a single spreadsheet. Organize the data by date to allow for easier analysis and rate comparisons.

4. Set Up Custom Formulas: Use custom formulas to calculate important metrics, such as occupancy rate, RevPAR (revenue per available room), and competitor price gaps. These formulas help you identify pricing opportunities and potential adjustments.

5. Apply Conditional Formatting: Enable conditional formatting to highlight high and low pricing trends, occupancy fluctuations, or demand spikes. This visual aid allows you to quickly spot areas that need attention.

6. Adjust Rates Manually: Based on your analysis, manually adjust rates within the spreadsheet, optimizing them according to demand, occupancy levels, and competitor trends.

7. Upload Adjusted Rates: After making adjustments, upload the new rates to your PMS and OTA channels for distribution. This step ensures updated rates are displayed across all booking platforms.

The manual approach to yield management requires time and careful analysis, but it provides control over pricing decisions and insights into market dynamics.

Automated Yield Management with Technology

For hotels with high booking volumes, automated yield management software, such as Infor EzRMS, IDeaS, and Duetto, can handle rate adjustments in real-time by continuously analyzing data. Automated systems use machine learning algorithms to forecast demand based on historical and market-level data, applying optimal rates automatically to maximize revenue.

Pros and Cons of Manual vs. Automated Yield Management:

Automated systems reduce the burden of responding to demand fluctuations manually, as they continuously optimize rates in real-time. This level of precision offers a competitive edge, as hotels with automated systems can react to market changes instantly.

A word of caution to those preferring manual control: As revenue management tools become more affordable, they’re widely adopted across hotel segments, making it harder to compete without automation. Many tools allow for partial automation, letting managers review rate suggestions before finalizing prices, providing a balanced approach to yield management.

Extra Credit: A Note on Price Elasticity and Perceived Value

One of the features of supply and demand is the concept of price elasticity, or the idea that different demographics may respond unexpectedly to prices. It’s the consumer’s “willingness to pay,” which doesn't always correlate nicely with classic supply and demand thinking, where higher prices reduce demand. Price elasticity can influence room rates as it’s about the perceived value of the goods being purchased. That’s why luxury hotels can keep supply low and prices high without necessarily dampening demand.

Even so, perceived value is hard to measure and won't show up in the data (at least not in a way that makes it easy to identify the role perceived value plays in how a consumer chooses to buy). And the reality of today’s industry is that travelers have more ways to stay than ever before. With the rise of alternative lodging, travelers can consider a wider array of options to find the price and product that suits their specific needs. Since consumers can easily substitute similar room types, amenities, and properties, there’s greater price elasticity. It's easier to get what they want without paying more than they want.

Greater choice means more competition and pressure to price properly. More so than ever, hotels must put the right price in front of the right customer on the right channel at the right time -- not to mention market their property with visuals and words that converts lookers to bookers.

Yield management is essential for optimizing hotel revenue, requiring a balance of strategic pricing, real-time data, and continuous analysis. Whether using manual methods or advanced software, understanding and applying yield management can position a hotel for greater profitability.